Your early 20s are the best time for financial planning

3 reasons why your 20s are the best time for financial planning.
Not realising this, warns C S Sudheer, can be a terrible mistake.
Illustration: Uttam Ghosh/Rediff.com

1. Early financial planning for compounding benefits

So why financial planning in your early 20s? The reason being, compounding return also called return on return.

Your investments give returns and on reinvesting these returns, you get more returns called compounding returns.

The earlier you start investing, longer is the time your investments have to grow.

You can easily invest the returns, enjoy more returns and be on the path to riches.

2. Early financial planning lays the foundation for your future

Failing to plan is planning to fail.

If you don't do financial planning in the early 20s, there's a strong possibility you won't have much money throughout your life.

3. Early financial planning gives lots of money for retirement

A young age means lesser commitments and you can easily take risks in investment.

Higher risks mean higher returns. That's lots of money at retirement.

Dos and Don'ts of financial planning

Some Dos

a. Do start financial planning with a budget

You might not have much money, but do make a budget.

Budget is nothing but keeping an eye on your money, what comes in is called earnings and what goes out is called spending.

Use a diary, an excel sheet or a budgeting app to keep a record of your money.

Budgeting teaches you to save first and spend later.

b. Do set financial goals

You must set financial goals at a young age. These goals may be buying a house or money for retirement.

Financial goals bring intensity in financial planning.

c. Do build assets for a secure future

Financial planning means you don't just leave money lying idle in a savings bank account. You invest the money depending on your risk-taking ability.

d. Do manage risk with insurance

You cannot just save and invest for a bright future. You have to cover risks.

You need life insurance, preferably term life insurance.

This is pure risk insurance with no survival benefit. You pay a premium for a sum assured.

If a policy holder dies within the term period of the plan, her/his dependents/nominees get the sum assured also called the death benefit.

You may not be married, but you can still avail term life insurance when you are young and healthy. You save on premium costs at a later stage.

Do avail a health insurance plan to cover emergency hospitalization expenses. This plan can be converted to a family floater health insurance plan to cover the entire family, post marriage.

Some Don'ts

a. Don't postpone financial planning

Are you in the early 20s? The best time for financial planning is, right now.

Delaying financial planning can cost a lot of money, as you have lesser time to attain financial goals.

b. Don't neglect financial literacy

Just earning is not enough. You must protect your money. Financial planning forces you to get financially literate.

Sound financial planning in early 20s means your hard-earned money is safe from fraud, identity theft and plain ignorance.

c. Don't forget to modify your financial plan

Even the best financial plan needs to be modified. You need to check your financial plan each year as life progresses.

If your goals or priorities change, so does the financial plan. Keep track of your financial goals and modify the financial plan when needed.

d. Don't put wants ahead of needs

Separate your needs from wants.

Financial planning teaches you the 30-day rule to control impulse spending.

Whenever you feel the need to splurge, force yourself to stop. Just let 30 days pass.

If you still need the item after 30 days, then go ahead and buy it.

C S Sudheer, Founder & CEO, IndianMoney.com